The big gamble that paid off

Alibaba's headquarters in Hangzhou, Zhejiang province. [Photo/Xinhua]

Foreign investors reap rewards of early investments in Internet firms

Some current and former employees of China's Alibaba Group Holding Ltd are expected to become millionaires as the e-commerce conglomerate heads into what is expected to be one of the largest initial public offerings in global history.

According to Alibaba's draft prospectus, employees hold 26.7 percent of existing shares, which could translate into roughly $44.8 billion worth of unlocked shares, according to estimates from a Bloomberg survey of analysts.

As the largest e-commerce company in the world and owner of the Taobao shopping site, Alibaba Group is valued at $168 billion. But employees, who built the company from scratch over some 15 years, are hardly the biggest winners of the Hangzhou-based company's upcoming IPO in the United States.

Foreign investors have emerged as some of the biggest winners in China's booming Internet market.

Masayoshi Son, chairman of Japan's SoftBank, a top telecommunications and Internet investor, is likely to regain his position among the world's richest people due to the welltimed bet he made on Alibaba Group in 2000. With the $80 million he invested, SoftBank became Alibaba's largest shareholder with a 34 percent stake worth $57.12 billion.

Yahoo! Inc, a US-based multinational Internet corporation, which invested $1 billion and holds 23 percent of Alibaba, could also score multiple billions of dollars from Alibaba's potential $20 billion listing.

"It is difficult to find TMT (technology, media and telecom) companies which have an annual growth of 50 percent in developed markets," says Annabelle Long, managing partner with Bertelsmann Asia Investments, a venture capital firm owned by Germany-based Bertelsmann AG.

"Growth rates even as low as 20 percent in Europe or the United States are difficult to find. But companies with such strong growth momentum can be found everywhere in China," she says.

"TMT is a high-growth sector in China compared with traditional industries," Long says. She describes TMT's deep and promising potential as "a blue ocean".

While developed Western countries are growing slowly, China's GDP growth is still more than 7 percent a year－amid lackluster performance by the world economy.

Bertelsmann Asia Investments has invested in more than 30 startups in China since 2009 and more than half of them are in the TMT sector, Long says.

Four of the companies that Bertelsmann has invested in have gone public, including the US-listed Bitauto Holdings Ltd, a leading provider of Internet content and marketing services for China's fast-growing automotive industry.

"We've made a lot from their IPOs. It would be amazing if we had invested more," she says, laughing.

Some experts say that despite the dizzying profits, foreign investors should make sure they have removed any semblance of rose-colored glasses before jumping in. Unfamiliarity with a foreign market and potential regulatory concerns are factors to consider, they say.

Still, there have been more than enough winning hands to tempt the hardy.

South African media company Naspers made $40 billion from a $34 million investment in what was then a startup－Tencent Holdings Ltd－the owner of the QQ messaging service and WeChat mobile messaging app, now valued at $120 billion. It is one of China's big three Internet firms, along with Alibaba and search engine giant Baidu Inc.

The venture capital firm Draper Fisher Jurvetson owned nearly one-third of Baidu when the Beijing-based company went public in the US in 2005.

JD.com Inc, China's second-largest e-commerce player after Alibaba, raised $1.78 billion in its US IPO in May.

Backers of JD include foreign investors such as US investment firm Tiger Global, DST of Russia and Prince Alwaleed bin Talal of Saudi Arabia.

Two decades ago, when the world's most populous country gained access to the Internet, Chinese dotcom companies, most of which were private, were desperately seeking investors.

Foreign venture capital firms with deep pockets and mature systems of investment were seen as knights in shining armor by many Chinese Internet startups, which worked to make themselves attractive investment prospects.

"Most of the Chinese TMT companies have business models that originate in the Western developed countries," says William Ng, Deutsche Bank director and head of sales of global equity services for Greater China.

"It is easy for foreign investors to understand Chinese Internet companies. For example, Alibaba can be sold to Wall Street as the Chinese Amazon. Weibo is known as the Chinese Twitter."

Ng, whose bank has been helping many US-listed Chinese dotcom companies with their American Depositary Receipts, says that TMT is the Chinese sector that meshes best with the US venture capital system.

"The US market provides Chinese TMT companies with a comparatively friendlier growth environment. Regardless of whether you are listing on NYSE or NASDAQ, there are more flexible regulations." Ng says, adding that stock markets in the Chinese mainland require companies to be profitable for three years in a row to go public, a very tough rule for Internet startups.